Contracts, In-House Counsel, Practice Pointers

House Rules: Risk / Reward

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I’m writing this wearing my new bifocals. They take some getting used to after years of regular glasses and contacts. But, after watching me examine small print like I was Mr. Magoo, my wife convinced me that it was time to take a symbolic plunge toward middle age. I admit to no small amount of trepidation at the prospect of wearing “old folks” glasses. But the risk of not seeing properly finally outweighed my vanity, and a change had to be made.

And so it goes with some legal decisions in-house. When faced with a dilemma, you weigh the risks versus rewards, and pull the trigger on what you hope is the right decision.

In a company the size of mine, people have performed risk/reward analyses on legal issues for years, down to the proper placement of semicolons in contract clauses. To borrow from the iPhone ads, yep, there’s a committee for that. We have Lean Six Sigma belts of all colors who are subject matter experts in every facet of our business. There are folks with many years of experience, who own any number of policies from which I am to draw when making decisions. It sounds on paper like filling in the blanks will get you where you need to go, but that is far from reality.

In a perfect world, for my job anyway, a Customer would receive a proposed agreement, see the inherent fairness in the document (and the work that went into carefully crafting all those clauses and semicolons), and sign on the dotted line. But sadly, life isn’t perfect, and I have yet to receive a contract back without so much as a redline….

Some folks go so far as to throw our contracts to the wayside, and submit their own documents for negotiation — the nerve. However, it is the norm in our world, and to be expected, as the Customer’s attorneys are looking to protect their client as much as I am looking out for mine.

It is these times that I earn my salary. Inevitably, the Customer’s document looks vastly different from the one sent to them for review, so I begin by reviewing vast internal resources to assist me in making decisions on what to accept and what to delete. After editing the document according to internal policies, there are usually areas not covered in a manual or playbook. Or, if they are covered, the Customer’s asks are beyond the usual limits of tolerance for risk. There are several ways to deal with these.

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First, I can push back and tell the Customer that the proposed language is outside the bounds of risk we’re willing to take on, or that the proposed language is not relevant to the deal at hand. This usually goes nowhere as, to be fair, countering language with a “nuh-uh” really isn’t advancing the cause for anyone. I’ve only had to use this once, and candidly, the other attorney wasn’t the sharpest tool in the shed. The attorney wondered where the risk was if the language wasn’t relevant. Oy.

Second, I can use the escalation ladder in place for contract exceptions, and let the process play out while the field sweats, panics, and has fits of impatience waiting for a response. Though this can be the least comfortable path to take, it pleases auditors and accountants to no end, and I have learned the hard way that pleasing those folks can make my life much more comfortable.

Finally, there are the instances when my decision must be based largely on my own experience with risk/reward outcomes. How would a judge interpret this clause? Have I seen this issue play out in litigation? Did it end favorably for the client in our position? Am I asking for trouble by agreeing to this? And really, what is the worst thing that can happen?

I usually arrive at a compromise position wherein the Customer’s ask is addressed, while taking on some level of exceptional risk. For instance, taking on a riskier force majeure clause for a Customer in Denver is a different ball of wax than taking on the same risk for a Customer in New Orleans. Again, I’m describing exceptional risk, and not boilerplate force majeure language. Hurricane Katrina wiped out New Orleans and my company took some heavy losses due to the tragedy. Denver is arguably relatively free from such potential devastation. So, the decision can be a bit easier regarding that Customer.

When it comes down to pulling the trigger late in the quarter on a risk proposition that has the potential for reaping big rewards in revenue, the question you have to ask yourself is whether it’s worth it to your company to accept the level of risk. Chances are slim that the particular risk will come to fruition. But if it does? Would it ultimately be worth the costs of the litigation, the cost to the business center or line of business, and potentially the cost to your job? The answer rarely falls into a neat pigeonhole of yes or no, but it is your job to decide. That’s why we get paid the big bucks.

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After two federal clerkships and several years as a litigator in law firms, David Mowry is happily ensconced as an in-house lawyer at a major technology company. He specializes in commercial leasing transactions, only sometimes misses litigation, and never regrets leaving firm life. You can reach him by email at [email protected].

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